DOJ's AT&T/TW Appeal Has Some Cheering, Others Scratching Heads

With some seeing a DOJ signal about aggressive antitrust enforcement and others scratching their heads, experts were all over the map about DOJ's planned appeal of the AT&T/Time Warner decision (see 1807120068). Some questioned whether the decision to appeal was politically motivated. Given President Donald Trump's animus toward TW's CNN, repeated as recently as this week, "you've got to think he's happy" about an appeal, said antitrust lawyer Seth Bloom. Similar political questions were raised about DOJ challenging the merger, which closed last month (see 1806150002). There was no clear consensus as to whether DOJ would appeal (see 1806130036). Justice didn't comment Friday.

Whether the appeal is expedited is also a question. Given the importance, the appellate court will act quickly, with oral argument as soon as November, said antitrust lawyer David Balto, who has U.S. Court of Appeals for the D.C. Circuit experience. If government seeks expedited treatment, it will most likely get it, with the case taking a few months, emailed antitrust lawyer Sandy Litvack of Hogan Lovells. He said an oral argument is almost certain, since such appeals are rarely decided on just the papers. A former DOJ antitrust lawyer said any DOJ argument to expedite is hurt by the fact the notice of appeal came a month after U.S. District Judge Richard Leon's verdict and that it let AT&T close on TW.

The department is likely trying to send a signal it's working hard to police large deals and it's also hoping to get appellate court validation for its model of harm, said antitrust scholar John Lopatka, Pennsylvania State professor of law. Leon's decision (see 1806120060) didn't question the model itself, just the facts here, but there's a big difference between it not getting tossed out and it getting reaffirmed, Lopatka said. That Leon's decision didn't ding the model makes the appeal surprising, he said. But it's unlikely the appellate court would toss out the DOJ harm theory since it would review the lower court's decision and not go beyond that, so the risk to the government of a loss at the appellate level isn't large, he said. Appeals tend to face uphill battles when the cases are highly fact-sensitive as is the case with AT&T/TW, meaning odds are the lower court decision will be affirmed, he said.

DOJ's 2004 U.S. District Court loss in its challenge of Oracle/PeopleSoft led to it being lax in deal enforcement for years after, and the AT&T/TW appeals notice is a "clear signal" the agency sees such enforcement as critical and won't give up because of one decision, Balto said. He said DOJ has a decent chance on appeal, given the general favorability the D.C. Circuit has toward the government on transaction cases and that the court might be somewhat eager to articulate clear standards on vertical deal enforcement. He said Leon's blanket acceptance of efficiency arguments is inconsistent with past D.C. Circuit decisions, such as Heinz/Beech-Nut, that were more skeptical of efficiency claims. Also helping the DOJ is that D.C. Circuit Judge Brett Kavanaugh is now tied up in his Supreme Court nomination and wouldn't hear the case, he said. The D.C. Circuit's 2008 Whole Foods/Wild Oats reversal of a lower court's decision that was as fact-based as the AT&T/TW ruling by Leon means the companies "aren't out of the water by any measure," he said.

The new appeal isn't surprising given the "skewed fact-specific findings, errors, inconsistencies and unbalanced treatment" of the sides' evidence, emailed Diana Moss, president of American Antitrust Institute, which opposed AT&T/TW. "DOJ might want to try to set the record straight." A Justice win on appeal "sets a much neater, clearer table" for other vertical deal enforcement, while a loss would mean "all of the bad stuff [in Leon's opinion] could be more entrenched in the case law," she said.

That AT&T agreed to a series of firewalls with Turner to run through early next year or until the end of a DOJ appeal (see 1806140041) shows Justice was thinking it would appeal, Bloom said. He said an appeal comes with risks for DOJ, but a win opens the door for stronger vertical transaction challenges. Because the appeal is likely going to involve errors of law, DOJ has "quite a serious burden" to success, he said.

Appeal's Basis

One possible legal basis for an appeal is the significance Leon gave to the efficiencies coming through vertical integration, since that significance wasn't based on any finding he made specific to the case but instead on the assumption vertical integration is very likely to generate very large efficiencies, emailed Cleveland State University professor of Law Chris Sagers.

The bar the government "has to make even to get in the courthouse door, before the defendant has to even put on evidence, is very high," said Sagers. While fact-finding is hard to appeal, in Leon's decision, it was unusual with a "strikingly anti-government bias" and some of it "was really pretty self-evidently wrong," he said.

Leon's ruling had some problems, such as seeming to think TW's incentives are the same whether part of AT&T or not, said antitrust lawyer Allen Grunes of Konkurrenz Group. He said Leon's criticisms of the government's economic modeling as a Rube Goldberg contraption ignores that such modeling is standard in modern economics theory.

If the appellate court overturns Leon, there's some flexibility on how it does so, Lopatka said. The District Court was litigating the preliminary injunction government was seeking and the likelihood the U.S. would prevail, but the case sent on remand would have the lower court litigating the merits of whether the deal substantially lessens competition, a subtle difference, he said. He said Leon theoretically could formulate behavioral conditions, but DOJ prefers structural fixes. Since AT&T/TW was a vertical integration, a very possible outcome would be Leon ordering the deal be undone, since there weren't overlapping parts of AT&T and TW separately that could be carved out, he said.

Senate Consumer Protection Subcommittee ranking member Richard Blumenthal, D-Conn., tweeted his support Friday for the appeal. “The moment it acquired Time Warner, AT&T showed its true face” and “raised prices,” Blumenthal said: The ruling that cleared AT&T/TW “threatens an era of anti-consumer mega mergers” and “immediately opened Pandora’s box of corporate consolidation.” Blumenthal cited his bid with three other senators for DOJ to review Comcast's bid for Fox's nonbroadcast assets (see 1807120049), saying “strong DOJ leadership on antitrust is vital.”

Analyst Downgrade

The appeal prompted a stock downgrade, though AT&T closed down less than 2 percent Friday.

The appeal is surprising, but DOJ has some advantages in the "reasonably liberal" nature of the D.C. Circuit Court of Appeals and on how Leon's finding -- hinging on the idea Turner wouldn't have different motivations or behave differently as part of AT&T -- could potentially be picked apart, MoffettNathanson told investors Friday. The odds of a DOJ win are "relatively low," but one wouldn't result in a complicated disentangling since AT&T agreed to postpone a TW integration until DOJ appeal. It said the notice of appeal is a big win for Disney in its bidding war with Comcast for Fox's nonbroadcast assets, since Fox's board wanted a reason to favor Disney's bid over Comcast's and was arguing about regulatory risk (see 1806260038).

Wells Fargo said the appeal is likely more about DOJ "earning political capital" than actually trying to undo AT&T/TW or perhaps force a sale of the Turner assets.

Citing the appeal and what it called a "frustrating delay," Raymond James Friday downgraded AT&T stock from "outperform" to "market perform." Analyst Frank Louthan said Leon's decision was correct and AT&T will prevail, but the appeal "is a significant overhang for an extended period." He said the appeal won't make Fox's board more enthusiastic about a Comcast counter offer unless it's significantly above $45 per share.